Commodity Traders! Know How To Interpret US Job Data For Trading?

As a commodity trader looking at any of the four commodity segments viz. energy, precious metals, industrial metals and agri products, the one thing that really impacts the demand and supply equation is the macros. Commodities prices are largely driven by global factors. Be it the price of gold, crude oil, gas or copper; the trend is set by the international markets and then Indian markets do a mark-up or mark-down on this base price. As a commodity trader, you are required to keep a close tab on a variety of macro factors and announcements. One such important announcement for commodity traders is the US Jobs data.

What is the US Employment (jobs) data and what does it indicate?

The U.S. Bureau of Labour Statistics releases the Employment Situation Summary on the first Friday of each month. This survey is also popularly known as the jobs report or the employment report. Essentially, this report estimates the number of people employed and unemployed, the number of hours being worked and a plethora of other related statistics and numbers. The jobs data shows whether the US economy is moving towards full employment or not. In the US context, jobless rate of 4-5% is classified as full employment. The US has been in a state of full employment almost continuously since 2016.

Jobs data is widely used by traders, analysts, economists, policy-makers, central banks etc. The jobs data is also seen as a barometer of public and corporate confidence, and therefore future business and hiring decisions. Let us take the example of oil to understand this point. If refiners are recruiting more aggressively; it means more refining capacity coming up and that would mean more crude being refined. This will increase the demand for crude and make it pricier. Of course, crude prices are impacted by a cross section of factors but this is an advance warning system. Commodities like oil, copper, zinc etc which have commercial applications use the jobs data as an early indicator of growth in the sector.

However, it is also essential to understand what the report does not talk about. The number of jobs being created can signify whether an economy is improving, overheating or waning. Unfortunately, since the numbers often get significant revisions long after their initial release, the Employment Report is not so much predictive as it is a confirmation of economic conditions. Secondly, the jobs data cannot be seen as a monthly trend indicator since there are wild swings from month to month and predictions could be way off target. However, in the longer term, it does give a structural picture and is useful for commodity traders.

How Indian commodity traders can use the jobs data?

Indian commodity traders use the jobs data for 5 principal reasons.

Jobs data is a good indicator of which sectors are seeing job creation, future expansion plans, rise in demand and expected increase in output. These are key factors in commodity prices.

Jobs data is used as an early warning signal when the negative turnaround comes in because job losses are the first signal that all is not well with commodity demand.

Jobs data has an impact on the Fed rates since any rate cut is predicated on weak jobs data. Fed rates set the tone for monetary policy globally and impacts commodity prices.

Jobs data also impacts the dollar and as we know most of the key traded commodities like crude oil and gold are largely dependent on dollar movement

Jobs data in user industries of agri products like dairies, food companies are a good indicator of demand for agri products and can impact global prices

While the jobs data is an important source of information for commodities, it also gives indirect cues through its impact on currencies. However, as mentioned earlier, this data can be vulnerable to wild swings on a monthly basis and hence secular trend may be more meaningful. Uncertainty aside, in relation to other employment and economy-related indicators, the Jobs Data does provide worthwhile information. In particular, unexpected results often indicate that something unusual is going on with the economy and employment. That is the kind of cues the commodity traders are waiting for anyways!